What you should know about EMIR Margin Requirements

For the purposes of limiting credit exposure between counterparties, ESMA requires counterparties to deposit margin as a means of collateral. This means that in the event of a counterparty default, margin protects the surviving party by absorbing losses, using the collateral provided by the default entity. This applies to both cleared and non-cleared OTC derivative contracts.

Types of Margin:

Initial margin: The collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty.
Variation Margin: the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts, and can therefore change over time. The amount of variation margin to be collected by a counterparty shall be the aggregation of the values of all contracts in the netting set, minus the value of all variation margin previously collected, minus the net value of each contract in the netting set at the point of entry into the contract, and plus the value of all variation margin previously posted.
Excess collateral: the actual amount of collateral paid is often higher than just the sum of Initial Margin and Variation Margin. This is particularly the case for the collateral collected by a CCP from clearing members.

Initial Margin:

• Where collateral is collected as initial margin, the following limits shall apply for each collecting counterparty:
  • The sum of the values of the initial margin collected from the asset classes referred to in points (b), (f), (g), and (l) to (r) on the asset classes list below, issued by a single issuer or by entities which belong to the same group does not exceed the greater of the following values:
    • 15 % of the collateral collected from the posting counterparty.
    • EUR 10 million or the equivalent in another currency.
  • The sum of the values of the initial margin collected from the asset classes referred to in points (o), (p) and (q) on the asset classes list below, where the asset classes referred to in points (p) and (q) of that list are issued by institutions, does not exceed the greater of the following values:
    40 % of the collateral collected from the posting counterparty.
    EUR 10 million or the equivalent in another currency.
• Where collateral is collected as initial margin in excess of EUR 1 billion and each of the counterparties are G-SIIs (global systemically important institutions) or O-SIIs (other systemically important institutions) or counterparties which are not pension scheme arrangements and for which the sum of the values of the collateral to be collected exceeds EUR 1 billion, the following limits to the amount of initial margin in excess of EUR 1 billion collected from a counterparty shall apply:
  • the sum of the values of the initial margin collected from the asset classes referred to in points (c) to (l) issued by a single issuer or by issuers domiciled in the same country shall not exceed 50 % of the initial margin collected from that counterparty;
  • Where initial margin is collected in cash, the 50 % concentration limit shall also take into account the risk exposures arising from the third-party holder or custodian holding that cash.
• Counterparties shall calculate initial margin no later than the business day following one of these events:
  • where a new non-centrally cleared OTC derivative contract is executed or added to the netting set;
  • where an existing non-centrally cleared OTC derivative contract expires or is removed from the netting set;
  • where an existing non-centrally cleared OTC derivative contract triggers a payment or a delivery other than the posting and collecting of margins;
  • where the initial margin is calculated in accordance with the standardised approach and an existing contract is reclassified in terms of the asset category as a result of reduced time to maturity;
  • where no calculation has been performed in the preceding 10 business days.

Calculation of Initial Margin:

Counterparties shall calculate the amount of initial margin to be collected using either the standardised approach set out in Annex IV or the initial margin models or both. The collection of initial margin shall be performed without offsetting the initial margin amounts between the two counterparties.

• Initial Margin Model: Initial margin models shall be developed in a way that captures all the significant risks arising from entering into the non-centrally cleared OTC derivative contracts included in the netting set, including the nature, scale, and complexity of those risks and shall meet the following requirements:
  • Currency risk factors
  • Interest rate risk factors
  • The yield curve
  • The risk of movements between different yield curves
  • separate risk factors at least for each equity, equity index, commodity or commodity index
  • the risk arising from less liquid positions and positions with limited price transparency
  • non-linear dependencies
  • determines which events trigger a model change
  • the risk of movements between similar, but not identical, underlying risk factors
  • incorporates methodologies used for back-testing which include statistical tests of the model’s performance
• Standardised Method: The notional amounts or underlying values, as applicable, of the OTC derivative contracts in a netting set shall be multiplied by the percentages in the following Table. The gross initial margin of a netting set shall be calculated as the sum of the products for all OTC derivative contracts in the netting set
  • The following treatment shall be applied to contracts which fall within more than one category:
    • where a relevant risk factor for an OTC derivative contract can be clearly identified, contracts shall be assigned to the category corresponding to that risk factor
    • where the condition referred to in point (a) is not met, contracts shall be assigned to the category with the highest add-on factor among the relevant categories
    • the initial margin requirements for a netting set shall be calculated in accordance with the following formula:

Net initial margin = 0,4 * Gross initial margin + 0,6 * NGR * Gross initial margin.

Where:

1. Net initial margin refers to the reduced figure for initial margin requirements for all OTC derivative contracts with a given counterparty included in a netting set;
2. NGR refers to the net-to-gross ratio calculated as the quotient of the net replacement cost of a netting set with a given counterparty in the numerator, and the gross replacement cost of that netting set in the denominator.

Asset Classes:

A counterparty shall only collect collateral from the following asset classes: 

1. Cash in the form of money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits; 
2. Gold in the form of allocated pure gold bullion of recognised good delivery; 
3. Debt securities issued by Member States’ central governments or central banks; 
4. Debt securities issued by Member States’ regional governments or local authorities whose exposures are treated as exposures to the central government of that Member State in accordance with Article 115(2) of Regulation (EU) No 575/2013; 
5. Debt securities issued by Member States’ public sector entities whose exposures are treated as exposures to the central government, regional government or local authority of that Member State in accordance with Article 116(4) of Regulation (EU) No 575/2013; 
6. Debt securities issued by Member States’ regional governments or local authorities other than those referred to in point (d); 
7. Debt securities issued by Member States’ public sector entities other than those referred to in point (e); 
8. Debt securities issued by multilateral development banks listed in Article 117(2) of Regulation (EU) No 575/2013; 
9. Debt securities issued by the international organisations listed in Article 118 of Regulation (EU) No 575/2013; 
10. Debt securities issued by third countries’ governments or central banks; 
11. Debt securities issued by third countries’ regional governments or local authorities that meet the requirements of points (d) and (e); 
12. Debt securities issued by third countries’ regional governments or local authorities other than those referred to in points (d) and (e); 
13. Debt securities issued by credit institutions or investment firms including bonds referred to in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council ( 1 ); 
14. Corporate bonds; 
15. The most senior tranche of a securitisation, as defined in Article 4(61) of Regulation (EU) No 575/2013, that is not a re-securitisation as defined in Article 4(63) of that Regulation; 
16. Convertible bonds provided that they can be converted only into equities which are included in an index specified pursuant to point (a) of Article 197 (8) of Regulation (EU) No 575/2013; 
17. Equities included in an index specified pursuant to point (a) of Article 197(8) of Regulation (EU) No 575/2013; 
18. Shares or units in undertakings for collective investments in transferable securities (UCITS), provided that the conditions set out in Article 5 are met.

Relative Articles:

• Guide to Valuation Reporting under EMIR
• How to populate Venue of Execution (field 2.15) – EMIR and UKMIR
• Clearing Threshold Under EMIR
• Guide to Collateral Reporting – EMIR